29 Jan 2020 2 min read

Are green sovereign bonds the penguins in Somalia?

By Anne-Marie Morris (née Cunnold)

Most of us are trying to do something to help the environment. Indeed, for Christmas I was given not one, not two, but THREE reusable mugs/ thermos flasks (clearly people know of my coffee addiction).  But how much impact are we really making, as opposed to just “virtue signalling” or, as my husband would put it, “helping the penguins in Somalia” (sounds great but is actually meaningless). 


We at LGIM have been similarly considering the relative merits of the UK government issuing “green gilts”, which could indeed form one potential part of a comprehensive focus on ESG that trustees need to implement and demonstrate across their portfolio.

ESG is of fundamental importance to us at LGIM, from inclusive capitalism and the quantitative integration of ESG considerations in our counterparty panel selection and review process, to the replacement of plastic cutlery with good old metal forks in our coffee shop. While it’s therefore no surprise that we have been considering whether green gilts could help our clients implement ESG in their portfolios, perhaps it’s not as straightforward as it may seem. To invest in green gilts, you should consider the following:

  • Are you willing to pay for the privilege, and if so how much (what should be the difference in yield between green gilts compared to the equivalent conventional gilts)?
  • Given that previously, conventional gilts were partly used for “green” purposes, does separating out green gilts mean that the conventional gilts effectively become “less green”? And then should this have a price impact on both green gilts AND conventional gilts?
  • And of course there is a question of what “green” really means that the proceeds will be used for?

These are particularly interesting questions that the Treasury would need to address, and we have been sharing our views with the UK government departments. Germany is also in the process of issuing green bunds, where they issue “twin bonds” with the same coupon and maturity to improve the liquidity of the new green bunds. Nonetheless, the effective illiquidity premium we might expect could offset some of the “green” cost. Certainly this illiquidity premium is found in other instruments such as the effectively UK government-backed Network Rail bonds, which are currently trading at a premium of around 15-25bps over conventional gilts. Potentially, green gilts could be used in a similar way to Network Rail bonds in DB pension scheme liability driven investment (LDI) portfolios, i.e. holding a small portion of these bonds alongside traditional LDI instruments. This could strengthen the ESG profile of our clients’ LDI portfolios, in conjunction with ESG integration in counterparty panels, our active engagement with counterparty banks, and our proactive campaigns with regulators and market participants to raise market standards.

If the UK government does decide to proceed with green gilt issuance, it will probably hope to encourage UK corporates to follow suit. I personally hope that the UK government will issue green sovereign bonds and that rather than being perceived as helping penguins in Somalia, they will be helping the polar bears in the Arctic.

Anne-Marie Morris (née Cunnold)

Head of DB Solutions Strategy

Anne-Marie leads the team responsible for the strategy of objective-driven investment solutions, principally for Defined Benefit Pension Scheme clients. In partnership with the Solutions Portfolio Management team, her team structures and delivers strategies across LGIM’s derivative overlay, LDI and CDI strategies including Buy and Maintain credit. Anne-Marie joined LGIM in 2012, bringing industry experience from prior roles including investment strategy at BlackRock and senior fund manager in structured investments and solutions at Close Brothers Asset Management. Anne-Marie is a CFA charterholder, holds the Financial Derivatives paper from the CISI diploma and graduated from Cambridge University with a first class honours degree in Natural Sciences (theoretical physics). When not eulogising about derivatives and LDI, Anne-Marie might be found exploring historic buildings with her two boys.

Anne-Marie Morris (née Cunnold)